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INTERNATIONAL FINANCIAL REPORTING STANDARDS

Fact Sheet

IAS 19 Employee benefits

(This fact sheet is based on the standard as at 1 January 2008.)

Important note:
This fact sheet is based on the requirements of the International Financial Reporting Standards (IFRSs). In some
jurisdictions, the IFRSs are adopted in their entirety, in other jurisdictions the individual IFRSs are amended.
In some jurisdictions the requirements of a particular IFRS may not have been adopted. Consequently, users
of the fact sheet in various jurisdictions should ascertain for themselves the relevance of the fact sheet to the
particular jurisdiction. The application date indicated below is identified in the IFRS, as such it may not be
relevant to the application date of any specific jurisdiction.

OBJECTIVE
IAS 19 Employee benefits prescribes the accounting treatment for employee benefits excluding share-based payments. The standard
prescribes recognition, measurement and disclosure rules for expenses, liabilities and assets (for defined benefit funds only) relating to
employee benefits.

This standard becomes operative for financial statements covering periods beginning on or after 1 January 1999. Note that there are
some definitions and recognition and measurement requirements for reimbursements which are operative for annual financial statements
covering periods beginning on or after 1 January 2001. (Please refer to IAS 19 for the specific details.)

PRESCRIBED ACCOUNTING TREATMENT


Types of employee benefits
IAS 19 deals with the following employee benefits:

• short-term benefits (e.g. wages)

• post-employment benefits (e.g. post-employment medical care)

• other long term benefits (e.g. long service leave)

• termination benefits

When an employee has rendered service to an entity during a reporting period, the entity shall recognise the amount of the associated
employee benefit cost as an expense unless the cost is included in the cost of another asset such as inventories or property, plant and
equipment. An associated liability is recognised to the extent that any amount of employee benefit remains unpaid to the employee.

Measurement
All short-term employee benefits, and termination benefits payable within 12 months of reporting date, are recognised at undiscounted
amounts, with all other benefits being recognised at present value (PV) The measurement takes account of legal and constructive
obligations to employees, and uses the amounts expected to be paid in respect of the service.

Discounted amounts — discount rate


For discounted amounts, the discount rate used is that for high quality corporate bonds matching the currency and term of the liability. If
there is no deep market, the rate used is the government bond rate, also matching the currency and term of the liability.

Short term employee benefits


These benefits include wages and salaries, and payment for short term compensated absences such as sick leave and annual leave, where
the absences are expected to occur within 12 months after the end of the period in which the employees render the related service.
It also includes profit-sharing and bonuses payable in the same 12 month timeframe, and non-monetary benefits (e.g. medical care,
housing and free or subsidised goods) for current employees.
IAS 19 Employee benefits

Figure 1:Measurement of employee benefit amounts

Employee
benefit
incurred

Recognise at
Short term Yes
undiscounted
benefit?
amount

No Yes

Post Benefit falls due


No Termination Yes No
employment within 12 months of
benefit? benefit?
reporting date?

Yes No

Unpaid
Defined contributions due
Yes Yes
contribution withing 12 months
plan? of reporting
date?
Other
No long term
No
benefit
Defined
benefit Recognised
plan using
discounting
(process
described in
AASB 119.78-82)

Post employment defined contribution plans


The entity’s obligation for each period is determined by the amounts to be contributed for that period. This is based on the employees’
rendered services for the period. No actuarial assumptions are required. The entity shall recognise the contribution payable to a defined
contribution plan in exchange for the service as follows: (a) as a liability after deducting paid contributions. and where there is a prepaid
expense an asset shall be recognised; and (b) as an expense unless another standard permits the inclusion of the contribution as an asset.

Post employment defined benefit plans


At the reporting date, the entity recognises a defined benefit liability comprising:

• the present value of the defined benefit obligation

• plus any actuarial gains (less any actuarial losses) not recognised

• minus any past service cost not yet recognised

• minus the fair value of any plan assets out of which the obligations are to be settled directly

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IAS 19 Employee benefits

The entity recognises income or expense on a net or gross basis comprising:

• current service cost

• interest cost

• expected return on plan assets and reimbursement rights

• actuarial gains and losses

• past service cost recognised during the period

Table 1 reconciles the opening and closing balances of the defined benefit obligation and the plan assets to demonstrate the relationship
between the individual income and expense items and the balance sheet.

Current service cost is the increase in the PV of the defined benefit obligation resulting from employee service in the current period.

Expected return on plan assets is calculated by multiplying the plan assets at the start of the reporting period by the expected rate of
return on them for the reporting period.

Actuarial gains and losses arise from unanticipated changes in, or changes in assumptions underlying, either the PV of the defined benefit
obligation or the fair value (FV) of any related plan assets. Causes of actuarial gains and losses include:

• changes in the discount rate

• current period employee turnover retirement and mortality rates differing from those expected

• changes in expectations about future period employee turnover retirement and mortality rates and salary levels

• the actual return on plan assets differing from expectations.

Termination benefits
Termination benefits shall be recognised when the entity has demonstrably committed to terminate the employment of an employee. This
may be in the form of a detailed formal plan for the termination and there is no realistic possibility of withdrawal from that plan. The use
of discounted or undiscounted amounts will follow the same timeframe principles as previously discussed.

Table 1: Reconciliation of obligation and assets


PV of obligation (start of period) FV of plan assets (start of period)

+ Interest cost + Expected return on plan assets

+ Current service cost + Contributions

+ Past service costs i.e. vested - Benefits paid


and non-vested benefits
+ Actuarial gain (loss) on plan assets
+ Benefits paid
= FV of plan assets (end of period)
+ Actuarial (gain) loss on obligation

= PV of obligation (end of period)

PRESCRIBED DISCLOSURES
Extensive disclosures are required for defined benefits plans and include reconciliations of the present value of the defined benefit
obligation, the fair value of plan assets and the total expenses recognised. It is important to note that an asset related to one plan cannot
be set-off against a liability related to a separate plan unless there is a legally enforceable right to use a surplus in one plan to settle
obligations under the other plan. This is consistent with IAS 1 Presentation of financial statements’ requirement not to offset assets
against liabilities of a similar nature.

Disclosures for other employee benefits covered by IAS 19 may be required by IAS 1, IAS 24 Related party disclosures and IAS 37
Provisions, contingent liabilities and contingent assets.

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IAS 19 Employee benefits

IMPORTANT DEFINITIONS
Actuarial gains and losses are the effects of differences between the previous actuarial assumptions and what has actually occurred,
and the effects of changes in actuarial assumptions.

Defined benefit plans are post-employment benefit plans other than defined contribution plans.

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity
(a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all
employee benefits relating to employee service in the current and prior periods.

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees.

Interest cost is the increase during a period in the PV of a defined benefit obligation which arises because the benefits are one period
closer to settlement.

Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) which do
not fall due wholly within twelve months after the end of the period in which the employees render the related service.

Past service cost is the increase in the PV of the defined benefit obligation for employee service in prior periods, resulting in the current
period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service cost may be
either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced).

Plan assets are assets held by a long-term employee benefit fund and qualifying insurance policies.

The present value of a defined benefit obligation is the PV, without deducting any plan assets, of expected future payments
required to settle the obligations resulting from employee service in the current and prior periods.

Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for
one or more employees.

Post-employment benefits are employee benefits (other than termination benefits) which are payable after the completion of employment.

Short-term employee benefits are employee benefits (other than termination benefits) which fall due wholly within twelve months
after the end of the period in which the employees render the related service.

Return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains
or losses on the plan assets, less any costs of administering the plan and less any tax payable by the plan itself.

Termination benefits are employee benefits payable as a result of either:

• an entity’s decision to terminate an employee’s employment before the normal retirement date

• an employee’s decision to accept voluntary redundancy in exchange for those benefits

Vested employee benefits are employee benefits that are not conditional on future employment.

OTHER MATTERS
1. Scope and Application
IAS 19 applies to the employer’s accounting for all employee benefits but does not apply to share-based payments (refer to IFRS 2
Share-based payment).

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IAS 19 Employee benefits

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This fact sheet series has been developed by CPA Australia Ltd. For further information visit cpaaustralia.com.au
CPA85451 03/2008